Transnational Gas Markets and Euro-Russian Energy Relations

Andrei V. Belyi

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781349579464, 9781137482976
• eBook ISBN: 9781137482983
• Topic: Politics & International Relations
• Subtopic: Energy Industry
• Index: Politics & International Relations

This books analyses how transnational gas markets have evolved and impacted on EU-Russia energy relations. It examines how the political conflict surrounding Ukraine has accelerated a negative interdependence in the region, with energy interdependence increasingly used as an instrument of diplomacy.

1

Energy in International Political Economy

International political economy (IPE) involves the analysis of complex interactions between political and economic factors related to policies, markets and societies and reflects classical political economy concepts relating to institutions. For instance, political and market institutions create conditions for the development of the mineral and energy sectors. In turn, access to resources, structures of demand and supply, the level of technological development and the specificities of each sector can impact on policy choices and market structures, as well as on political and economic practices. Furthermore, resources and infrastructures can be the objects of conflicts and consequently create a context of deinstitutionalization. Political economy debates have shaped a number of questions about the role of natural resources in policies, norms and human interactions. Can the economics of natural resources or conflicts over access to resources affect on policy choices? Or are resources to be used as an instrument of power in the general policy framework? Do political and institutional contexts influence the way in which energy markets are shaped? Or, on the level of economic development, are energy-related interests the decisive factor in economic decisions? To what extent do states play a role in shaping energy markets and to what extent do markets influence national decisions?

Global political and economic interrelations have been assessed against various theoretical models, most of which either directly or indirectly involve energy infrastructures, markets and policies. Some scholars refer to a conceptualization of different levels of interrelations.¹ These levels comprise the following: a very general level, which includes studies of the world system and the global economy; the national level, which involves issues such as the role of states and interstate relations; and, lastly, the level of specific detail, at which matters such as networks of influence and lobbying can be examined. This chapter does not seek to amalgamate different levels and different discussions, since segregated levels of analysis offer a means of applying different explanatory logic in respect of events. For some scholars, the global level is more important than the level of specific detail; for others, the national level is the primary focus, and so on. The objective here is to understand the complex interlinking that has occurred within IPE, which seeks to put the global, regional and individual levels on an equal footing. IPE rejects either a state-centred or market-based determinisms and instead involves the crafting of multilevel complexities and interactions.

Bearing in mind the theoretical background provided by various IPE approaches, this chapter focuses on four levels. The first, and the most general, level concerns the main aspects of the interaction between energy and institutions. This involves a conceptualization of the impact of resources on political institutions and vice versa. The second level of analysis relates to IPE’s structural powers. Unlike the first level, it addresses IPE’s more empirical concepts and analyses global trends in structural developments. The third level is the national level. It deals, in particular, with issues related to energy security policies, which remain focused on the national level. The fourth level covers energy governance, which implies particular networks at national, international and transnational levels. Multiple sources of governance involve market players, non-governmental organizations (NGOs) as well as states and international institutions. The objective of this theoretical modelling is to demonstrate the various dimensions of energy markets and policies, structural powers and interactions between economic and political factors in the field.

Energy and the political economy of natural resources

A number of recent publications have highlighted the need to analyse international energy governance. Without questioning the importance of these new debates, one needs to understand that they stem from classical scholarship relating to the political economy of natural resources. Once scholars address the role of energy in IPE, it becomes impossible for them to ignore both classical and modern debates about the role of resources in the global economy, in terms of both policy development and international relations. Therefore, a number of traditional questions as to political economy need to be readdressed.

Classic debates in the political economy of natural resources

The classical debate on resource–economy interrelations, related to possible incompatibilities between the use of resources and of economic growth, stems from Thomas Malthus. This 19th-century British thinker highlighted the fact that crops become scarcer in times of economic growth, causing the population to face serious crisis. For instance, Thomas Malthus noted that ‘the power of population is indefinitely greater than the power in the earth to produce subsistence for man’.² The Malthusian dilemma was later corrected by technological development and the decline of agriculture in the global economy. Nevertheless, the Malthusian concern has re-emerged in the context of oil geopolitics, especially since the 1970s. Indeed, the crisis of 1973 and its consequences demonstrated that a natural resource can be vital for the global economy. For instance, David Price noted: ‘Starvation will be a direct outcome of the depletion of energy resources. Today’s dense population is dependent for its food supply on mechanized agriculture and efficient transportation.’³

There is a certain conceptual parallel between Malthusian theory and peak oil theory.⁴ For instance, peak oil theory considers that oil production will at some point enter into a process of declining production rates resulting in depletion. Nevertheless, this eventuality has been constantly postponed because of an economic progress, which includes a development of non-traditional hydrocarbons.⁵

However, technological development cannot be disassociated from policies and institutions at both national and international levels. Hence, institutions in larger sense have been able to mitigate the negative effects of resource limits.

Natural resources and various models for their management and extraction make up part of the complex macro-social development of such policies and institutions. Some scholars refer to the self-organization concept, which implies a constant interrelation between societies and resources. In similar vein, some refer also to the ‘wolves-rabbits’ relations model⁶ as a means of defining limits to growth. This model is based on the idea that the number of wolves depends on the availability of rabbits, so that if the number of rabbits decreases, the number of wolves will tend to do so too. On the other hand, if the number of rabbits increases, the number of wolves is also likely to grow. In addition, rabbits are dependent on the availability of grass, which is therefore a direct survival factor for them and an indirect survival factor for wolves. In IPE terms, the logic of the ‘wolf-rabbit’ model would work as follows. In turn, once demand for oil grows, the oil price increases. Furthermore, the price stimulates the development of alternative fuels. A high oil price stimulates innovation in the energy sectors in general. Hence, inter-fuel competition restrains the oil demand, and therefore peak oil is not reached. At the same time, there is a ground for the development of hydrocarbons as well as alternative fuels in the context of growth in demand and high oil price.

An interrelationship with more empirical data can also be demonstrated. A growing oil price encourages new investments, particularly in respect of exploration and production. For instance, according to Barclays Equity Research, this expenditure increased from about USD 200 billion worldwide in 2005 to more than USD 600 worldwide in 2012. Global investment in exploration and production then reached a record level of USD 682 billion in 2013 and USD 723 billion in 2014. Growth in the oil price in 2012–2013 resulted in a 10 per cent increase in capital investment. By contrast, when the oil price fell to USD 8 per barrel in 1998, investment in exploration and production also dropped to minimum levels. Moreover, the subsequent decline in investment in the early 2000s might have contributed to the oil price increases in 2003 and 2005.⁷

Another correlation in the political economy of energy is that oil price can create difficulties for oil production in general. A rising oil price contributes to increases in service costs. In particular, the cost of leasing oil and gas equipment and of conducting offshore development declined throughout the 1990s when the oil price was low. An upward trend then began, reaching a peak in 2008, when the oil price reached a record of USD 148 per barrel. During the period between 2009 and 2012, the cost of leasing oil equipment grew by 17 per cent, the cost of leasing gas equipment grew by 8 per cent and offshore operating costs grew by 7 per cent. In this context, the overall returns of the oil and gas companies decreased in spite of the oil price increase.⁸

On these grounds, it can be asserted that the international hydrocarbon economy forms part of the more general debate on the political economy of natural resources. Oil and gas development depends on global economic growth, demand pattern, price and economic structures in general. These complex interactions have evolved into more detailed market modelling, but IPE studies rarely address these dynamics.

Societal perceptions of energy crises, paradigms and willingness to pay

The notion of energy crisis and of societal reaction to it remains the key point of the political economy of natural resources. A French political economist, Renaud Gicquel, has defined an energy crisis as being formed of two categories⁹: the availability of energy supply issues and environmental impacts. The first of these categories concerns the political and economic risks related to energy supplies. These may stem from very obvious political decisions, such as the reduction of supply by exporters or a refusal to buy hydrocarbons on the part of importers; or they may involve market-related issues such as underinvestment, the lack of profitability of new oilfields and so on. Environmental impacts may involve greenhouse gas emissions, the environmental consequences of nuclear accidents and various environmental problems related to the production and use of hydrocarbons (oil spills, losses of energy in transportation and so on).

This classification indicates an evolving political approach to energy. Therefore, the approach taken towards each energy crisis will depend on political and social preferences in respect of them and on the priorities in responding to them. Furthermore, policy considerations influence the IPE. For example, either the development of a policy of self-sufficiency or, on the contrary, further integration into world energy markets and either the development of an international environmental regime or a focus on national policies aimed at rational energy use. Furthermore, energy crises imply IPE consequences. These include technological and economic development, conflicts surrounding natural resources and the development of national and international legal norms. The consequences of energy resource use in IPE accordingly fall into at least four categories:

• Conflicts over access to natural resources and over transport routes

• New forms of international governance both for energy markets and in respect of the mitigation of environmental pollution consequences

• Cross-border investment in energy sectors and growing interdependencies in international trade

• Regional cooperation in infrastructural development.

Conflicts over natural resources can reshape the structures under which power and wealth are divided. Likewise, the development of cross-border economic activities gives rise to the appearance of international firms and traders. The development of regional infrastructure also helps promote new market and policy practices.

It is worth noting that the societal perception of energy crisis is never static.¹⁰ During the first half of the 20th century, the main area of concern was physical access to the resource – either coal or oil. Since the end of the 20th century, the focus has shifted to the price of the resource, especially the world oil price. Lastly, current perceptions of crisis relate more to climate change risks than to the availability of resources. Back in the 1970s, the risk of resources being depleted was perceived as a major concern. An understanding of societal perceptions of resource-related crises allows us to grasp the actual policy preferences and how they vary over time and between different regions. Much of the new literature on energy governance addresses the development of policy paradigms, which shape the choices on offer.¹¹

At this juncture, it is worth calling to mind the classic institutional concept of willingness to pay (WTP). WTP reflects three main variables: (1) the value of the public good to be achieved; (2) the ability of the society (state, company, individuals) to cover the costs; and (3) the cost of the public good. The WTP may vary from one case to another where energy problem resolution is concerned. Consequently, WTP may impact on further economic and technological development, because in practical terms it conditions agents either to contribute or not to contribute to market and technological innovation.

For example, the concept of WTP can be considered in respect of energy security objectives. The higher the level of energy insecurity involved, the higher the value of attaining security becomes. However, WTP may decrease again if the costs of the objective become too high.

Significantly, the concept of WTP allows us to consider variations in priorities between stakeholders regarding energy policy. Indeed, WTP may vary not only from a state to another but also between various industry branches, societies and organizations. The level of WTP can be either high enough to influence investments into additional security or low if economic costs of security become too elevated.

Between infrastructures and institutions

Societal perceptions of policy priorities and the WTP in respect of the implementation of such policies refer back to the classical debate on the role of resources in developing institutions and on the institutional influence upon resources. The Marxian approach gave primacy to infrastructure over superstructure, which reflected a stage of economic development. The level of infrastructural development at issue includes overall economic interactions, encompassing the production mode and accumulation of capital. At the same time, one might observe that the infrastructure itself has an influence on economic structures and interactions. It could be argued that the development of oil products in the transport sector during the 1950s and 1960s transformed the economic landscape in most industrialized states. Coal consumption decreased, and new transport networks, both rail and road, began to take shape, while first petroleum and then natural gas began to penetrate electricity generation portfolios. Curre...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures and Tables
• Foreword
• Acknowledgements
• List of Abbreviations
• Introduction
• 1. Energy in International Political Economy
• 2. Towards Transnational Gas Markets
• 3. The Background to Energy Interdependence in Euro-Russian Relations
• 4. The Europeanization of Energy Policies and Its Impact on EU–Russia Relations
• 5. FSU Geopolitics and Weaponization of EU–Russia Energy Interdependencies
• Conclusion
• Notes
• References
• Index